Reassessing the “Race to the Bottom” in State Welfare Policy

Abstract

On the assumption that poor people migrate to obtain better welfare benefits, the magnet hypothesis predicts that a state's poverty rate increases when its welfare benefit rises faster than benefits in surrounding states. The benefit competition hypothesis proposes that states lower welfare benefits to avoid attracting the poor from neighboring states. Previous investigations, which yield support for these propositions, suffer from weaknesses in model specification and methodology. We correct these deficiencies in a simultaneous equation model including a state's poverty rate and its benefit level for AFDC (Aid to Families with Dependent Children) as endogenous variables. We estimate the model using pooled annual data for the American states from 1960 to 1990 and find that a state's poverty rate does not jump significantly when its welfare payments outpace benefits in neighboring states. Furthermore, there is no evidence of vigorous benefit competition among states: states respond to decreases in neighboring states' welfare benefits with only small adjustments in their own.Perhaps the most controversial debate in the recent literature on welfare policy concerns the validity of the "race to the bottom" thesis. This thesis entails propositions about the behavior of both the poor and state policy makers. Patterned after economic theories about location decisions (e.g., Tiebout 1956), the thesis suggests that welfare benefit levels play a significant role in the residential choices of the poor. Specifically, the migration hypothesis predicts that poor persons will migrate from states with low welfare benefits to those with more generous assis-

Welfare and the Multifaceted Decision to Move

“…State wage data are the average retail wages for food stores from the Census Bureau (2000); data from this sector of the economy reflect the earnings potential of low-skill women (Berry, Fording, and Hanson 2003). State unemployment data are from the Bureau of Labor Statistics (2001).…”

Performance rating and yardstick competition in social service provision

“…[43], Figlio et al [29], Saavedra [44], Wheaton [53], Bailey and Rom [6], Berry et al [7]. 5 Brueckner [16] reviews the empirical welfare competition literature.…”

“…5 Brueckner [16] reviews the empirical welfare competition literature. 6 Shroder [47] and Berry et al [7] represent exceptions, in that they estimate structural models including a bene¯t setting equation and a recipiency ratio (poverty rate) determination equation.…”

“…However, the mobility of the bene¯ciaries of personal social services is likely to be rather low, virtually ruling out the 7 In the UK, the¯nancial year starts on 1st April and ends on 31st March. 8 The Moran test is a sort of spatial Durbin-Watson statistic that represents a measure of the similarity in value (covariance) and association in space (contiguity).…”

Fiscal Decentralization - A Survey of the Empirical Literature

“…Does the empirical literature find this race in welfare transfers, or at least a significant migration of poor/rich based on welfare differentials? The answer is probably negative -evidence suggests that very few poor people migrate from state to state in the United States in search for higher welfare benefits (Hanson and Hartman 1994, Allard and Danziger 2000, Berry et al 2003. This might be one of the factors allowing states to increase welfare transfers (Volden 2002).…”